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Milojko Arsić, Professor Of The University Of Belgrade Faculty Of Economics

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There’s no high risk of a public debt crisis or a banking crisis in Serbia for now, but the country is confronted by unresolved systemic problems, such as legal uncertainty, inequality for market participants and high corruption.

Although the latest package of measures intended to help the economy can be considered as being economically ineffective, because the same effects could have been achieved with less money, there is still no reason to fear a possible public debt crisis. Citizens and businesses today don’t consider these measures as being unfair, even though money is being given to both the rich and the poor, but a question remains as to how they’ll react when austerity measures are launched during the election year of 2022 – says Milojko Arsić, professor at the Faculty of Economics in Belgrade, with whom we discussed the short- and long-term repercussions of COVID-19 on economic activity in Serbia, the inflow of foreign investment and the creation of new jobs.

What should we remember about the first 100 days of the term of this Government of Serbia?

When it comes to the economy, the most important measures of the Government in the first 100 days included the adoption of the budget for 2021, the announcement of a new package of economic incentives, as well as the dispute with freelancers over the retroactive collection of taxes. After the implementation of the announced package of measures, the result of fiscal policy for this year will be a fiscal deficit of around six per cent of GDP, as well as additional state borrowing totalling approximately two billion euros. Public debt will exceed 60% of GDP during the course of this year, but the country’s fiscal position will remain solid, meaning that the risk of a public debt crisis will remain low.

In order for fiscal policy to remain sustainable in the future, it is essential to reduce the fiscal deficit significantly in the coming year, in order to halt the growth of public debt. Reducing the fiscal deficit economically is relatively easy to achieve, because there was a one-off increase in public expenditure while public revenue decreased, but no increase occurred in the structural fiscal deficit. However, a sharp reduction of the fiscal deficit during the election year of 2022 will represent a political challenge.

The dispute with freelancers over the payment of taxes indicates that, instead of a systematic fight against the grey economy, we will continue to see the dominance of ad hoc actions that are legally and economically problematic. Introducing obligatory payments of taxes for everyone who earns an income in Serbia, including freelancers, is indisputable, but the imposing of retroactive tax payments is a blatant example of legal uncertainty, but also the unequal treatment of taxpayers. An additional problem is that this stifles a prosperous part of the economy that creates significant added value and provides a high inflow of foreign currency.

Under the circumstances of a recession and the pandemic, justifiable reasons exist to apply an expansive fiscal and monetary policy, but that creates room for measures motivated by political reasons to be justified using economic and epidemiological arguments

We have many announcements of a package of measures of the Government of Serbia intended for the economy and citizens, but that package has not been fully clarified. How do you evaluate the announced measures and their possible effects?

From the perspective of credibility, it is not good when the Government proposes a large package of incentive measures that implies a budget rebalance just a month or two after adopting the budget for 2021. No substantial new information appeared during the last two months that wasn’t already known in the period when the 2021 budget was adopted.

When it comes to the package itself, it is dominated by non-selective measures, which means that a large part of this assistance will be given to enterprises and citizens who haven’t been hit by the crisis. In this sense, the package can be considered as being economically ineffective, because the same effects could have been achieved with less money, but also unfair, because equal assistance is provided for both rich and poor citizens alike. Despite these noted shortcomings, the proposed package will have a positive impact on the economy in the short term, as it will contribute to increasing domestic demand and preserving jobs and citizens’ standard of living. The long-term effects of the package are controversial, because Serbia will emerge from the crisis with higher public debt than it needs in order to achieve its economic and social objectives.

There is currently talk about the possibility of presidential elections, early parliamentary elections and elections for the City of Belgrade being held in one or two waves at the end of this year and the beginning of 2022. What kinds of effects could this election activity have on the economy, and how, in that context, do you consider the latest announced package of measures of the Government of Serbia to help the economy and citizens?

Fiscal expansion on the eve of elections has the consequence of temporarily improving the performance of the economy, i.e. accelerating its growth, preserving employment, increasing wages and citizens’ standard of living.

Focus-Milojko Arsic

Under the circumstances of a recession and the pandemic, justifiable reasons exist to apply an expansive fiscal and monetary policy, but that creates room for measures motivated by political reasons to be justified using economic and epidemiological arguments.

The presence of political motives in shaping fiscal policy during last year and this is visible primarily in the fact that the assistance provided to the economy and citizens is approved non-selectively, in order to gain the support of the broadest possible sections of the population. It benefits the government that most citizens don’t perceive these non-selective measures as being unfair, nor do they consider the fact that such a policy increases the public debt that citizens will have to repay in the future.

The pandemic has, to an extent, anaesthetised our ability to see long-term trends. However, after almost a year of working under the conditions of a pandemic, what can we say about the key trends?

The pandemic’s impact on economic activity over the next few years will depend on how many lasting consequences it has on the economy in the form of increased public and private debt, worsening credit quality, rising unemployment etc. If the pandemic causes a public debt crisis or a banking crisis in some large economy, that will have a negative impact on the recovery of the world economy, while if such a crisis hit a small economy it would only have negative consequences for that country. The slower recovery of the world economy in the medium term could be influenced by restrictive fiscal policy measures to prevent a public debt crisis, as well as increasing the interest rates that maintain monetary stability.

When it comes to Serbia, there is no high risk of a public debt crisis or a banking crisis for now, but the country is confronted by unresolved systemic problems, such as legal uncertainty, inequality for market participants, high levels of corruption, an inefficient state administration etc. I expect foreign trade exchanges to continue to grow rapidly after the end of the crisis, and for isolationist policies to be applied temporarily and sporadically.

Introducing obligatory payments of taxes for everyone who earns an income in Serbia, including freelancers, is indisputable, but the imposing of retroactive tax payments is a blatant example of legal uncertainty, but also the unequal treatment of taxpayers

The majority of experts believe that COVID has fundamentally changed or accelerated some trends, including the relocating of large multinational companies closer to home and reductions in investments made beyond their home countries. What could this mean in the long run when it comes to the Serbian economy’s growth model?

The tendency of companies to invest more in their own country than would be the case on the basis of economic calculations has been known for several decades. This tendency increases particularly strongly during times of crisis, when foreign investments decline significantly more than total investments. Total global investments last year are estimated to have fallen by about 10%, while foreign direct investments fell by about a third. FDI is expected to grow again following the end of the crisis, but the geographical distribution of this investment will probably be somewhat different. One of the expected changes is a reduction in investments by European companies in China and other Asian countries, particularly when it comes to the production of goods that are sold outside of those countries. The basic reason for this is the rising cost of production in China, which has resulted in it becoming more cost-effective to locate production for the European market in less developed parts of Europe than in China, while an additional reason is the growing strategic rivalry between the West and China. This is one of the changes that could be accelerated by the pandemic, and which could benefit countries like Serbia.

This whole situation is also predicted to have long-term ramifications for the labour market. What is now visible to the naked eye in this respect and what awaits us in the future?

It is possible that the pandemic will accelerate digitisation and development of artificial intelligence, which will result in a large number of existing jobs being replaced by machines. It is likewise possible that technical progress in other areas will create new economic activities and new jobs. Technical progress since the start of the industrial revolution has created significantly more jobs than it has taken away, but there is no guarantee that this will continue in the future. Another change to the labour market that’s quite likely is an increase in the percentage of people working almost entirely from home, as well as those who occasionally work from home. This will result in lower workplace labour costs, which will impact positively on demand for labour. On the other hand, increasing work from home can have a negative impact on quality of life or increase the percentage of temporary and casual jobs, as well as encouraging the growth of the grey economy.

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